Context analysis and business model

CONTEXT ANALYSIS

Acea monitors the reference context, identifying and analysing the factors that could take on a significant role in terms of the Group’s operations, such as competitiveness, sustainability, legislative and regulatory areas that can affect the achievement of strategic goals. In addition to these external factors, there is also the internal context of the Group, to be considered both in organisational terms and in relation to the energy and environmental impacts, the development of human capital, the protection of workers’ health and safety, the protection of company assets, and the sustainable and responsible management of the supply chain.

THE ENERGY MARKET AND COMPETITORS

Following the conversion into law of Decree Law 183/2020 “Mille- proroghe” (1000 Delays) with Law 21/2021, the termination of the price protection schemes for domestic customers and micro-businesses was extended to 1 January 2023, while the subsequent law converting Decree Law 152/2021 implementing the NRRP, which came afterwards, defined the timings and methods for managing the transition to the free market, through a gradual protection regime. In particular, micro-businesses will be served through gradual protection as of 1 January 2023, by suppliers identified through auctions held in 2022, while domestic customers will be served through gradual protection by suppliers identified through auctions which must be held by 10 January 2024. Vulnerable and energy poor customers will be served on the protected market until an ad hoc offer is made available by all the sellers, as defined by ARERA. With regard to energy sales, once the greater protection service is no longer applicable, there will be an increase in competition among operators and the search for distinctive added-value elements, which are achievable through investments in technological innovation, digitalisation and sustainability. As regards customers on the free market, Acea Energia is consolidating its position on sustainability and environmental protection by developing its range of green commercial tariffs and offering added-value products such as boilers, air conditioning units, the Acea e-mobility App for e-vehicle charging, and the option to integrate telephony services into the energy supply contract through the partnership with WindTre.

THE INTEGRATED WATER SYSTEM AND GAS DISTRIBUTION

Water and gas distribution are market areas in which Acea intends to play an active role, evaluating and participating in the new tenders called for the concession of the Integrated Water Service and gas distribution service, by the various contracting authorities (Regions, Municipalities, Area Authorities) throughout the country. In fact, Acea Group can easily compete with other operators in the sector as it fulfils the necessary economic, financial, organisational, experience and certified system requirements. In the water industry, in particular, the Group has planned works on strategic infrastructure of interest for the National Recovery and Resilience Plan and has implemented a digitalisation process of the commercial procedures as well as the greater application of technological innovation in the management of infrastructure.

THE WASTE MANAGEMENT MARKET

The Acea Group operates its waste management services through the management of facilities in Lazio, Tuscany, Umbria, Marche, Veneto, Piedmont, Abruzzo and the Aosta Valley.
Acea Ambiente has been investing in the circular economy for years, a commitment made concrete through the recycling and recovery of secondary raw materials, the transformation of organic waste into high quality compost and biogas for electricity production, the integration of sewage sludge treatment into its water services, the treatment of liquid waste, waste disposal, and waste-to-energy services.
The Group is continuing to expand in this sector through the acquisition of existing plants across Italy to consolidate and grow its activities and position in the consortia systems (COMIECO, COREPLA, CORIPET, CONIP, etc.) and progressively improve the performance of its plants.

 THE ENGINEERING AND SERVICES MARKET

On the technical services market, Acea Elabori provides cross-disciplinary services across the three key areas of the Group's operations: Water, Energy, Environment. In particular, it provides engineering services - including project design, project validation verification and construction supervision - analytical laboratory services, innovation research and specialist consultancy in the water cycle, waste cycle and energy sectors. Currently these activities are provided almost exclusively to other companies in the Acea Group (so-called captive market”) and to a minor extent to third parties (non-captive market”).
ìWith a view to expanding its activities on the non-captive market, in 2022 Acea Elabori participated in tenders for district-planning, surveys and measurements, modelling and plans for water and sewer systems, and plant design and works. The Principals are mainly integrated water service operators who require specialised services to support the plans to rationalise and upgrade integrated water cycle networks and plants. Participation in tenders is done through temporary joint ventures with other companies, implementing the codes of conduct provided for under the Anti-trust Model and the Organisational Regulation on Anti-trust Compliance and Prevention of Unfair Commercial Practices adopted by Acea.

THE ENERGY EFFICIENCY MARKET

The energy efficient building market is regulated by Decree Law 34/2020 (“Relaunch Decree”), converted by Law 77/2020, which introduced tax benefits (110% super bonus), with the possibility of credit transfer and invoice discounts, for beneficiaries who carry out energy efficiency and seismic consolidation work on their buildings. In this area, the Acea Group - through the companies Ecogena, Acea Innovation and Acea Energia - has identified business development opportunities in the residential sector. The various developments in 2022, such as the amendment to the deduction rate through the 2023 Budget Law, operational challenges in the sector, low availability of supplies and skilled labour, and problems in the management of tax credits linked to the related tax incentives, reduced the opportunities initially identified and point towards the suspension of activities in the building redevelopment sector.

INSTITUTIONAL INVESTORS

In 2022, global equity markets saw a negative trend, in particular affected by the increase in energy prices, in part due to the war in Ukraine and the increase in raw material prices, which led to increased inflation and a weakening in the growth of global GDP. European countries felt the impact of the tensions associated with the counter-sanctions adopted by Russia in response to the sanctions imposed by Europe and the change in energy supply policies. In this context, the NRRP (National Recovery and Resilience Plan) was confirmed as one of the key growth factors for Italy's economy in 2022. The European Commission disbursed the first tranche of loans under the NRRP in response to Italy's progress in implementing reforms and planned investments, including those to promote the energy transition and the circular economy. In the current macro-economic situation, sustainable funds have proven to be more resilient than conventional funds.

SUSTAINABLE DEVELOPMENT

The war in progress in Ukraine has once again demonstrated the interconnectedness of the global situation, with effects felt throughout the world. In the energy sector, the block in supplies had major consequences, acting as a push to reopen plants utilising polluting energy sources. The European Union responded with the REPower EU plan, with the aim of reducing dependence on fossil fuels coming from abroad and accelerating the green transition. The situation in 2022 had a major impact on energy costs for businesses and families, with public institutions preparing protective responses.
In terms of climate, data from the EU Copernicus observatory recorded extreme climate events, record temperatures and rising greenhouse gases globally in 2022. In Europe, continuing high temperatures had repercussions for agriculture, river transport and energy management. Drought conditions also led to an increased risk of fires, resulting in an unusually high number of incidents in south-west Europe.
The global and national institutional initiatives implemented should be viewed and evaluated in this context. COP27 on the climate, held in Egypt, and COP15 on biodiversity, in Montreal, had objectives which included expanded protected areas and regenerating damaged ecosystems (30% by 2030). Domestically, note the constitutional reform of articles 9 and 41 and the National Climate Change Adaptation Plan.
During the year, Europe adopted certain specifications and significant provisions with regards to corporate sustainability. The Corporate Sustainability Reporting Directive, was published in the EU Official Journal, an update of the Non-Financial Reporting Directive of 2014, which expands the range of companies subject to reporting requirements and introducing significant changes, for example double materiality, preparation of new standards and the inclusion of a disclosure in the Report on Operations. Institutional work on the Di- rective relative to corporate due diligence requirements on environmental protection and human rights within the value chain continued, which in December led the EU Council to adopt guidelines on the subject. Regulation 2020/852 (“EU Taxonomy”) included in 2022 activities associated with nuclear energy and fossil fuel gasses among those potentially environmentally sustainable, governing the criteria for technical screening. Additionally, in the second year of application, it calls for reporting by companies of correlated economic KPIs in addition to eligible activities to those aligned.

ENVIRONMENTAL AND ENERGY IMPACTS

The natural environment is the scenario where the activities of the Group are performed and is to be preserved with a responsible and efficient use of resources, protecting sources, safeguarding the natural areas where the plants and service networks encroach, mitigating the physical and the external impacts generated in the ecological context of the operating processes.
In November 2022, COP27 was held in Sharm el-Sheikh. Negotiations were focussed on five themes: decarbonisation, climate adaptation, nature, food and water. The Conference ended with the issuing of the Sharm el-Sheikh Implementation Plan. This agreement maintains that ratified in the Glasgow Climate Pact (COP26), which included the commitment by signatory countries to keep global temperatures below an increase of 1.5°C with respect to pre-industrial levels and highlighted the need for a transition to a system based on renewable sources, with a reduction in the use of fossil fuels. Efforts to gradually eliminate coal were encouraged, favouring low-emission sources and promoting the elimination of fossil fuel subsidies. At the national level (Nationally Determined Contributions- NDC), countries which have not yet presented their decarbonisation commitments were encouraged to do so, while those that already have were asked to update them by the end of 2023. The main change involves the introduction of the “loss and damage” principle, which calls for the payment of indemnities to the most vulnerable developing countries for climate damage suffered. This principle will be implemented through the establishment of a specific Fund.
With reference to the issue of greenhouse gas emissions, again in 2022 Acea participated in the Carbon Disclosure Project – CDP, receiving a B grade and positioning the Company in the Management class. In 2022, in addition to publishing its first 2021 Climate Disclosure, based on the TCFD recommendations, Acea moved forward with a new project intended to enrich the identification of risks and medium/long-term climate scenario analysis.

STANDARDS IN THE REFERENCE MARKETS AT A LOCAL, NATIONAL AND SUPRA-NATIONAL LEVEL

The regulatory context of the Acea Group is wide-ranging and articulated according to the specificity of the businesses handled and the variety of the frameworks within which the legal and regulatory disciplines intervene, which affect the business operations, from administrative authorisation profiles to those protecting the market and competition. Added to such aspects are the specific features of being a listed Company, with the related legal impacts, for example, in terms of regulating communications to the market.
As already noted, tensions on the energy market and the continued COVID-19 health emergency marked the year, above all due to the systemic effects of high energy and raw materials prices, which led to specific legislative actions, initiated by the Draghi government and continued by the new one, aimed at mitigating their effects.
The various provisions (Decree Law 21/2022 “Price Cuts Decree Law”; Decree Law 50/2022 “Aid Decree Law”; 2023 Budget Law) that were implemented to govern the solidarity contributions mechanism borne by entities in the energy sector to limit the effects of high prices for businesses and consumers are also framed in this way.
Also associated with the extraordinary energy situation and significant for its impacts on energy companies, are the provisions on excess profits and suspension of unilateral changes to electricity and gas supply contracts. Relative to the former, Decree Law 4/2022, “Supports-ter Decree Law” established compensation mechanisms for producers using renewable sources which, under certain conditions, can lead to excess profits to be paid to the GSE; relative to the latter, Decree Law 115/2022, “Aid-bis Decree Law” called for companies to halt unilateral changes to energy supply contracts with regards to definition of prices, and the subsequent Decree Law 198/2022, “Thousand Extensions Decree Law” extended the period of validity (30 June), excluding application for expiring contracts. In 2022, consultation for implementation of Directive (EU) 2020/2184 was requested, on the quality of water destined for human consumption, following which the Council of Ministers in December approved the preliminary examination the Legislative Decree for implementation. Important changes include the revision of regulations intended to protect health from negative effects deriving from contamination of water intended for human consumption, guaranteeing “health and cleanliness”, also through revision of the relevant parameters and values, definition of hygiene requirements for materials coming into contact with potable water, the introduction of a risk measurement and management approach that is more effective in terms of preventive health and environmental protection, also with regard to costs and allocation of resources, strengthening the role of the Water Safety Plans (WSP), and improvement of equitable access for all to safe potable water and public information on water intended for human consumption. In 2022, the delegated law on restructuring regulations for local public services was implemented with Legislative Decree 201/2022, which restructured the regulations, included among the objectives of the National Recovery and Resilience Plan (NRRP), to promote competitive dynamics that help improve the quality of public services and the results of management in the interest of citizens and users.
Also worthy of note is the preliminary approval on 16 December 2022 by the Council of Ministers of the Legislative Decree scheme to renew the Public Contract Code, intended to simplify regulations relative to public tenders and concessions to ensure efficient realisation of the same. The Code will apply to new proceedings starting on 1 April 2023. From 1 July 2023, abrogation of the previous Code is envisaged (Legislative Decree 50 of 18 April 2016) and application of the new norms, also for proceedings in progress.

REGULATION OF THE SECTOR AUTHORITY

The Regulatory Authority for Energy, Networks and the Environment (ARERA) intervenes in Acea's business sectors (energy, water and environment) regulating their operation by defining technical and commercial service standards and regulating investment mechanisms.
With regards to energy distribution, ARERA defines national electricity service standards for each regulatory cycle which regulate commercial aspects (quotes, works, supply activations/deactivations, complaints procedure) and technical aspects (service and supply continuity). The V regulation period is currently active, which regulates the quality of distribution, metering and transmission services for the years 2016-2023. As of 1 January 2022, Resolution 566/2021/R/eel mandated the application of the new capacity fee to electricity market customers aimed at remunerating the capacity market (the system to make available electricity generation capacity), to ensure adequate production capacity is achieved and maintained to guarantee coverage of national demand as well as the necessary reserve margins.
In the water sector, drivers of change include progressive advancement in ARERA regulation, which prioritises operator efficiency, and the growing importance of environmental sustainability issues, which are the subject of political and economic strategies intended above all to fight the impact of climate change.
Resolution 547/2019 amended and supplemented the regulations on contract quality with effect from 1 January 2020, establishing an incentive system divided into bonuses and penalties to be attributed from 2022 based on the performance of the operators.
In late 2022, with Resolution 734/2022 the Authority approved the methodological note on the first preliminary findings of the proceedings for the quantitative assessments under the contractual quality incentive mechanism for 2020-2021. With regards to technical quality, with Resolution 183/2022 the Authority approved the ranking of water service operators based on the technical quality performance achieved in the 2018-2019 two-year period, awarding - for the first time since the incentive mechanism was set up - rewards and penalties to sector operators.
In the environmental sector, ARERA’s activities, in line with the duties assigned by Law 205/17 (art. 1, paragraph 527) are aimed at governing the integrated management of urban waste and the individual activities associated with it, guaranteeing accessibility and usability of the service throughout the country while simultaneously ensuring service provision levels and adapting the infrastructure as a whole to achieve European objectives. The remit of the Authority falls within a multi-level sectoral governance system, characterised by statutory responsibilities on general targets (including the circularity targets set by EU legislation, and the adoption of the National Waste Management Programme - PNGR) and local (regional) responsibilities on the planning of services. In this context, Resolution 363/2021 (so-called MTR-2) for the regulatory period 2022- 2025, introduces access restrictions on end-of-cycle plants and therefore aims to promote efficient management consistent with the European waste management hierarchy (including through an equalisation mechanism, to be adopted in 2023, aimed at providing incentives for plant solutions to recover energy and materials and discourage the use of landfill).

DEVELOPMENT AND TECHNOLOGICAL INNOVATION

The Innovation Model calls for development of national and international partnerships, with players in the innovation ecosystem active in sectors of strategic interest to the Group, to activate privileged channels of access to ideas, business and technological opportunities, academic research and identify new talents to innovate business, processes and corporate products.
In this context, key actions include the continuation of Acea’s participation in Zero Accelerator, to support the best innovative startups and SME developing technological projects and solutions in the greentech sector, as well as the House of Emerging Technologies in Rome, the first permanent living lab to develop the Smart City project. Also in its relations with public entities collaborative initiatives are promoted to share research and innovation commitments. This includes, for example, the Acea Elabori Labsharing project developed in cooperation with ENEA, intended to take advantage of their respective assets and share laboratories technologies and high level know how to support environmental research and monitoring through an approach open to innovation and sustainability.
In 2022, Acea launched and inaugurated, through its partner Mind the Bridge, an Innovation Antenna in Silicon Valley with the aim of forging relationships and identifying emerging technology with a significant impact on the sectors in which the Group conducts business.
Acea also works with the academic world and with specific Observatories, such as the Observatories for Digital Innovation, Startup Intelligence and Space Economy, all belonging to the Politecnico di Milano.

DEVELOPMENT OF HUMAN CAPITAL

For every organisation people represent a fundamental asset to remain competitive in a changing economic and social context. Acea listens to the needs of its people and develops a People Strategy, structured into projects and initiatives.
Every year Acea prepares an Equality & Care Plan that identifies goals and associated projects for diversity and inclusion and corporate welfare. In 2022, the Group developed an Equality, Diversity and Inclusion Policy and established an Equality, Diversity & Inclusion Committee, which will guide the process of cultural evolution to promote a corporate culture on the subject. It also appointed an Equality, Diversity and Inclusion Manager, responsible for coordinating activities to prepare and monitoring an operating plan for the initiatives and to support the Committee. Acea SpA has also achieved UNI/PdR 125:2022 certification on gender equality.
Acea has developed an integrated corporate welfare system, based on listening to employees and their needs and structure around six fundamental pillars: health, psycho/physical well-being, family, reconciliation measures, economic assistance and complementary social security. Numerous initiatives have been implemented to support these pillars, including preventive medicine campaigns, support services for psycho/physical well-being and support for parents. These areas are shared with a Bilateral Committee, consisting of representatives from Group companies and the Unions.
As part of its training processes, the Group has established the Acea Business School Academy that provides courses on managerial, position, governance and digital issues, serving the entire group and designed with qualified partners (universities, business schools, research centres, etc.). Additionally, investment in digital skills continued in 2022.

SUSTAINABLE MANAGEMENT OF THE SUPPLY CHAIN

Aware of the positive contribution that sustainable supply chain management can offer to protecting the environment, Acea is committed to defining purchasing methods that include intrinsic characteristics of the products and aspects of the process that limit environmental impact and foster initiatives aimed at minimising waste, reusing resources and protecting the social aspects involved in the procurement of goods, services and works. In tackling this green procurement issue, Acea has been using the Minimum Environmental Criteria in force for several years, including non-compulsory bonus aspects in its tenders.
Acea recognises the value of the companies in its supply chain that have chosen to be certified in the quality, environment, safety and energy schemes and has launched initiatives to develop and promote companies that demonstrably apply sustainability criteria, invest in safety training for their workers and use environmentally friendly means to carry out their activities.
Acea carries out second party audits on its suppliers to raise awareness and support continuous improvement of the supply chain. The direct involvement of suppliers and the opportunities for discussion created during periodic audits make it possible to measure the level of awareness of emerging sustainability issues and provide an opportunity to jointly consider paths to improvement. Additionally, Acea has established contractual standards that expressly require adhesion to and compliance with both the Organisational Control Model 231 (if suppliers have not already provided themselves with one), and the Antitrust and Consumer Protection Regulation Compliance Manual - General Principles, as well as the Anti-corruption Policy adopted by Acea.
As part of increased monitoring of its supply chain, in 2022 Acea extended the Group Vendor Rating system, which includes a bonus indicator for aspects associated with social and environmental sustainability (Ecovadis), as a tool for analysing, assessing and monitoring supplier performance. In 2022, the number of suppliers evaluated with Ecovadis increased significantly.

SAFETY AND HEALTH IN THE WORKPLACE

Safety as a strategy, not to be observed only for compliance purposes, is based on the desire to promote the widespread dissemination of a safety culture, involving all employees, and on the possibility of measuring and monitoring results. To this end, Acea runs awareness-raising campaigns on the issue and has adopted an advanced risk assessment model and implemented control and mitigation measures. ACEA has also launched a number of initiatives to raise awareness of and involvement in the issues discussed above with its contractors and sub-contractors, key business partners throughout the entire value chain. A Group RSPP Coordination Committee is active, with the aim of sharing the results of safety performance, experiences, good practices and sustainable solutions to prevent accidents in the company. The Group has adopted the H&S (Health and Safety) Dashboard as a tool to obtain data on workplace health and safety performance. It is updated constantly with graphs that improve analysis of the data provided by the companies of the Group.
In line with Law 4 of 15 January 2021 and the requirement to protect the psycho/physical health of its employees in the workplaces envisaged under article 28 of Legislative Decree 81/08, Acea guarantees an inclusive, integrated and centred approach to gender perspectives to prevent and eliminate violence in the workplace. In this sense, the Risk Assessment Document was updated and supplemented with regards to this aspect, with more specific risk assessments for all homogeneous groups and identification of measures intended to prevent and, if necessary, contain the risk in workplaces.
The Coronavirus Prevention Committee has been active since 2020, the Group body responsible for carefully monitoring the epidemiological situation and developments in the emergency situation, evaluating the most appropriate actions in the exclusive interest of health, safety and prevention for all employees of the Acea Group.

THE BUSINESS MODEL

The organisational structure (Chart no. 3) means that the Holding performs the role of steering and coordination of the Companies that make up the Group.
Acea SpA offers managerial support by means of management and legal, logistic, technical, financial and administrative services. Acea SpA’s organisational macrostructure consists of corporate functions, departments and operating segments the operating companies report to (see Chart no. 4).

Chart no. 3 – Acea’s Business Model

Chart no. 4 – Acea SpA organisation chart as at 31.12.2022

Through Companies that it has equity investments in and for which it plays the role of industrial entity of reference, the Acea Group is involved in the chains of activities shown below. The business activities are broken down in the Strategic Plan (see the section titled Strategy and Sustainability), which defines corporate development guidelines based on the assessments of opportunities offered by the market, the regulatory and social context of reference, the governance system and a thorough identification and weighting of the risks that can impede the achievement of the goals. Acea Group pursues corporate management that is consistent with the principles of sustainable development and pays the utmost attention to interactions with the natural environment and stakeholder relations.